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Aug 9, 2016

Earlier this week, I promised I'd share specifics on how much is enough to retire, and how to go about doing it early... or in other words, how do I access money before the IRS approved age of 59.5?

How Much is Enough

"So, if I spend 30k/year for my family of 3, and I have 750k saved in index funds... yep, I'm financially independent."

You're probably thinking "yeah, good for you, you've managed to save 25x your annual expenses in index funds... but how do I execute retiring early?" I'd imagine the bulk of readers haven't accrued $750,000 in investments, but hopefully this will still be useful information. If you're anything like me and have a mix of taxable (non-401k or IRA money) and retirement accounts (401k, IRA), the best approach for planning is to determine 4% of a principle amount ($30k is 4% of $750k), then strategize how you will spend it. The IRS restricts access to 401k and traditional IRA funds, but an excellent strategy is available to you you may have never heard about. One of the best descriptions I've found comes from Root of Good's Climbing the Roth IRA Conversion Ladder post. Give it a gander and hurry back.

So, does that give you some food for thought? Save 5 years (at least) in taxable accounts, and make an annual roth conversion that you can use in 5 years time, while assuring you account for inflation with the amounts you convert?

Great!

Allocation

As far as allocation, what funds to put it in, etc., I'll share what I personally do (note this is not a recommendation--I'm not licensed to do that, but hopefully my plan gives useful information).

That's it! I can't really add much more to it. Yes other methods for withdrawing funds from taxable accounts exist (72t, 55 years old+ authorized to withdraw from 401k), but I just wanted to share the most useful method in my opinion. Like my signature at the top of the site suggests, the winning strategy is simple, BUT NOT EASY. Now, if you have annual expenses of 30k*--get busy saving 750k so you can retire!

*For my personal scenario, I have a paid off house so this reduces the annual expenses I need to save. For folks with a mortgage, on average this adds around 10k-12k/year, so your target index fund investment portfolio balance may be closer to $1,000,000.

How much do you have saved? What is your latest net worth milestone (ours is 600k). What percentage are you to Financial Independence (FI)?

If you haven't already seen my updates post, give it a look. Lots of great resources I discovered that you may find useful as well.

Aug 7, 2016

What does that mean though? Simply put, the early retirement community points to having 25 years worth of expenses saved as the indicator for being financially independent. So, if I spend 30k/year for my family of 3, and I have 750k saved in index funds... yep, I'm financially independent. I'll cover the specifics on how this is done in the future, but for now--that's enough.

How Do I Do It?

Well, to focus on the Pareto principle, don't buy too much car and too much house on credit. Oh, and watch your "eating out" expenses. These are the biggest culprits I see from my clients, and you would do well to keep a lid in these areas. I know that seems like someone telling you to "spend less" and doesn't seem like that great of advice, but I truly believe a focus on these areas will put you ahead of 90% of investors. This will also serve the purpose of "burning the candle at both ends" potentially reducing your annual expenses which will require a smaller "stash" as Mr. Money Mustache would say.

But Why? What Will I Do All Day?

Most people don't have a hard time buying into the idea of not having to work anymore, but if you're one of the select few that are ultra-motivated, view it instead as Financial Independence, rather than retirement. This way, you can DO YOUR BEST WORK! What does that mean for you? Have you put off being an entrepreneur? Would you like to spend more time with your kids, or volunteering in non-profits? Have a desire to learn a new skill like being a home-builder? Financial Independence allows you to do this?

Example

Yours truly just eclipsed the 600k net worth milestone. What does this mean? Am I financially independent yet?

Nope, not quite.

I plan to sell our current home in a high cost of living location, and purchase a new home with cash for around $300k. This leaves $300k in index funds. Using the Trinity study, I know I can spend approximately 4% (with several margins of safety) annually, adjusted for inflation, with a relatively high level of certainty I won't run out of money over a 50 year period. (Rawr, yes, early retirement experts are angry with this statement, but relax, I WILL earn money through part time/entrepreneurial ventures so RELAX)!

With 300k in investments, this provides 12k/year in income. My family's annual expenses are 30k though, so I need another $450k to be able to claim financial independence. By my estimates, I should reach that coveted title in about 5 years.

Until next time friends! If you'd like future posts sent directly to your email inbox, please subscribe by typing your email address into the box on the upper right. I promise not to spam at all, just posts (probably 2 to 3 a month max).

Jun 8, 2016

This isn’t a post on how to accumulate massive amounts of
wealth, or to assist with identifying what types of careers or business
ventures will allow you to retire well ahead of the commonly accepted “Full
Retirement Age” of 65-67.

This is an overview and “food for though” for the individual
interested in discovering how to leave their job or business for good to live
off their accrued investments for a period of more than 30 years.

An Example

Bert is 47 years old with a wife, and 2 children beginning
college this year.Thanks to a
successful career in his 20s and 30s, and a business he sold last year, he has
accrued $3,500,000 in a mix of taxable and tax-advantaged retirement accounts
held at Vanguard.

Bert would like to consider himself “financially independent”
and he and his wife are considering using the “R” word as their newest
profession.

(The “R” word is Retired… if you haven’t had your coffee
yet).

So… what do you think?

Well, if you’re anything like me, at first glance I think they are good to
go.But lets take a closer look at how
they might go about solving this desirable problem.After all, how many lottery winners lose
their fortunes within a few years of winning it!

How long will your retirement be?

We never know when we'll die, but in my financial modeling... the age of 95 looks like a pretty conservative figure to use for our example.

Assuming either Bert or his Wife live to the ripe old age of 95, that leaves 48 years that they'll need to survive on this nest egg!

Down the line, social security will likely help a bit, but Bert has decided to view SS as more of the "icing on the cake" and will focus instead on his investment portfolio as the primary source of future income.Enter the Trinity Study

"One scenario backtested in the Trinity study suggests that a retiree
with a suitably allocated $1 million portfolio could withdraw $40,000
the first year, give herself a cost-of-living adjustment every year
afterwards, and have a 98% chance of the portfolio lasting at least 30
years."
This sentence pretty much sums up one of the most commonly referenced studies of the rate at which retirees should withdraw from their retirement accounts to assure it lasts the standard 30 year retirement window. (Age 65 to 96).

But remember the name of our post?

How to retire, EARLY.

So Bert and Co. have a time horizon of 48 years. What % of their portfolio can they withdraw each year, and can they adjust for inflation?

It seems that the consensus among forum members over at bogleheads.org, (one of the most widely read and followed investing forums on Earth) is that a withdrawal rate of 2-2.5% should be used for perpetual withdrawals.

For example, if the Rockefeller family creates a charitable trust with $100,000,000, in order to preserve principle and keep up with inflation, these funds should be invested in some form of a 25 to 75% equity allocation, and the annual withdrawal should not exceed 2%, adjusted upward each year at the rate of inflation. This would (hopefully) ensure that annual gift giving could continue far into the future.

Since Bert and his family have a time horizon of 48 years, hardly FOREVER, it would be a logical assumption that a 2.5% withdrawal rate on $3.5 Million ($87,500) adjusted for inflation would result in a high success rate.

(By the way, one method of adjusting for inflation is to find out how much social security payouts increased each year and increase your withdrawals by this %). Is It Enough?

How did Bert arrive at this healthy portfolio balance? Well, a successful career in his 20s and 30s, as well as the sale of his business was the primary source of the wealth he's accumulated. Do you think $87,500 adjusted each year for inflation would support his family's lifestyle?

I'd assume so, but what if he didn't save a high percentage of his income? Or what if his annual expenses were $150,000 throughout his adult years? Would his family be able to retire and keep their current lifestyle?

Herein lies the question. If Burt ended up with $3,500,000, he either made a high income, was a very disciplined saver, inherited it, or a combination of the three. I can almost assure you that the average family earning the median US income will not reach this figure by age 47.

The Allocation Variable

The Trinity Study also took into account the overall mix of an investor's portfolio, and how it may effect success rates. The short version is, investors in their 50's and 60's should consider having between 40 and 60% of their portfolio in equities (the rest in bonds) to retain buying power. Here's my asset allocation plan, you're welcome to use this as a starting point:

Stay the Course:
Age..........Ratio

25-50........80 stocks/20bonds

51-65........65/35

60-75........50/50

over 75.....35/65.
(Equities divided 70/30 between Domestic and International)
60-65 year old would be in the 65/35 if still working, in the 50/50 if not.

Now that you have a grasp of what it takes to retire early, do you think you have what it takes? A retirement age of 60 to 65 may very well allow a safe-withdrawal-rate of 4%. If you've accumulated $1,000,000 by age 65, this would leave you with $40,000/year. But if you choose to retire in your 40s or 50s, this may only support an income of $25,000/year.

I hope you have a better understand of what you'll need to do to retire early if that is your desire, be it by increase your savings rate, or MAKING MORE MONEY. Whatever the case, it would be wise to aspire to have fun along the way, and do you best to not run out of money in your golden years.

May 27, 2016

My oh my has it been a while since I typed some stuff into this site. My world has changed DRASTICALLY! I welcomed my first child (TB Jr.) into the world last spring and completed my MBA this month. It was truly a wild 22-month journey, and this site has suffered for it, but the phoenix will rise again!

I'll detail my current progress in future posts, but my net worth as of 5/27/2016 is 565,000 so we're well on our way!

Discoveries I've Made About FI/RE
When I founded this blog in 2013, I was a firm believer in boglehead principles. While the excellent minds over there are still a daily read for me, I've shifted my lens a bit to the early retirement community and have been incredibly energized by posts such as Mr. Money Mustache's The Shockingly Simple Math Behind Early Retirement. Posts such as these have prompted a fierce behavioral shift in my spending patterns, and I'm proud to say my family has exceeded a 60% savings rate in both 2015 and 2016. This has added rocket fuel to our net worth growth, taking it from ~$400k to today's new high of $565,000 despite a flat stock market. (Real estate has done well in Hawaii though). My wife and I have an income of 90k/year, so the math tells me via excellent resources like the networthify calculator I can retire on Independence Day, 2022.

Ethos for Tortoise Banker

If I had to summarize my Ethos for this site, it would consist of the following pillars:

Aim to save at least 50% of your income

Invest in low-cost index funds

Denounce consumerism

Help others along the way

I also wrote a set of foundational principles which make for a great read to assure you're on the right track with your finances.

I'll speak to each of this in upcoming posts, highlighting how exactly I got to where I am, and takeaways I've discovered on my path to FI/RE that might help YOU get there as well.

Thank you for your valuable time as I know all of you are exceptionally busy, and be sure to subscribe to future updates via the email box on the upper right section of the site.

May 26, 2016

I don’t think anyone has one defining moment or conversation that led them to begin investing. For me, I began developing an interest in long-term investing after exploring career paths. My first real exposure to the concept of investing came in the form of an unpaid internship at a boutique sized investment bank in Los Angeles.

Hours upon hours were spent inputting data into excel spreadsheets and creating charts and graphs for marketing presentations. Lunch breaks at my desk and heading home at 7pm quickly became the norm.

There was a silver lining came at the end of each day though. The asset manager I was interning for would take me aside into the client entertainment room for a game of pool and a draft beer.
I know… not too shabby.

I’m very grateful for the time my boss took to share these books with me, as they really ignited a passion I never knew I had. Not to get rich; although that’s a nice byproduct. The real passion that was ignited within was a desire to become financially independent, or no longer reliant on an employer.

One of the “gems” he would constantly remind me of was to START NOW. “Put anything you can away RIGHT NOW. Gather up $1000 and throw it into a target date retirement fund at Vanguard, and focus on nothing more than increasing the % of your total income saved over time. Build your net worth ALWAYS.”

He was a very successful asset manager, and I’m sure he was near the top of the industry in his line of work, but he’d always remind me that you need to focus on “saving now, and saving as much as you can afford.”

It wasn’t until I reached my mid-twenties that I realized that dollars stash into retirement accounts in the early part of your career are FAR MORE valuable than dollars invested later in life.

Let’s take a look at an example of a 25 year old investor that puts $5000 into an IRA each year until he turns 35, and not a dollar more. We’ll compare that result to 35 year old investor that doesn’t begin funding an IRA until age 35, where he begins contributing $5000/year until age 60. You might think that the 35 year old investor contributing to their IRA for 25 years would end up with far more than the 25 year old investor doing this for only 10 years, but let’s take a look at what happens when compounding increases an investor’s returns over time:

Begin at 25/8% Return

Begin at 35/8% Return

Age

Investment

IRA Balance

Age

Investment

IRA Balance

25

$5,000

$5,400

35

$5,000

$5,400

26

$5,000

$11,232

36

$5,000

$11,232

27

$5,000

$17,531

37

$5,000

$17,531

28

$5,000

$24,333

38

$5,000

$24,333

29

$5,000

$31,680

39

$5,000

$31,680

30

$5,000

$39,614

40

$5,000

$39,614

31

$5,000

$48,183

41

$5,000

$48,183

32

$5,000

$57,438

42

$5,000

$57,438

33

$5,000

$67,433

43

$5,000

$67,433

34

$5,000

$78,227

44

$5,000

$78,227

35

$5,000

$89,886

45

$5,000

$89,886

36

$0

$97,076

46

$5,000

$102,476

37

$0

$104,843

47

$5,000

$116,075

38

$0

$113,230

48

$5,000

$130,761

39

$0

$122,288

49

$5,000

$146,621

40

$0

$132,071

50

$5,000

$163,751

41

$0

$142,637

51

$5,000

$182,251

42

$0

$154,048

52

$5,000

$202,231

43

$0

$166,372

53

$5,000

$223,810

44

$0

$179,682

54

$5,000

$247,115

45

$0

$194,056

55

$5,000

$272,284

46

$0

$209,581

56

$5,000

$299,466

47

$0

$226,347

57

$5,000

$328,824

48

$0

$244,455

58

$5,000

$360,530

49

$0

$264,012

59

$5,000

$394,772

50

$0

$285,132

60

$5,000

$431,754

59

$0

$569,981

60

$0

$615,580

Total Investment: $55,000

Total Investment: $130,000

Portfolio Value: $615,580

Portfolio Value: $431,754

As you can see, the aggressive youngster that decided to skip morning coffee runs and expensive bar tabs ended up with a 30% larger nest egg than the investor that delayed until the age of 35.

Now I know many people in their 20s are focused on other priorities, and that’s fine. Getting married, paying off student loans, buying a car, and saving for a down payment are all expensive and deserve our full financial dedication.

But what if we decided to take the frugal path, and route money that might have gone toward a lavish wedding and honeymoon, or a brand new car into our retirement accounts? I know several people that paid less than $250 for exchanging vows at the county courthouse and later enjoyed a potluck barbeque with family saving over $20,000!

Buying a new car is one of the most expensive mistakes many people make. By buying a 2 to 3 year old vehicle, we’re able to get a 30% discount on the purchase price, a possible savings of over $10,000!

Take a moment to think of some ways you may be able to “delay gratification” and send excess funds into your retirement accounts! I know you’d like to be in a position more like the left hand column above than the right.

Apr 26, 2016

A college student was awarded $4.1 million dollars in a settlement relating to mistreatment by the DEA. The student was arrested along with 9 others in a raid of a home on April 20th, otherwise known as "Four Twenty" by recreation marijuana smokers.
The DEA agents discovered:

18,000 pills of extasy

10 ounces of Marijuana

Guns

Thousands of rounds of ammunition

Allegedly, the student was locked in a dark, windowless cell for 5 days and nights and was forced to drink his own urine to survive. He shared a shocking story during the interview, literally trying everything he could to survive. He was unsuccessful in his attempt to strike the ceiling sprinkler to get access to water, as well as getting the attention of anyone outside his cell by sliding his shoestrings beneath the door.

The interview did not share details of what would have led to the lapse of responsibility by the jail facility to care for their inmate, but it sounded to me like he was just forgotten about!

In a last ditch effort to survive, he consumed his own urine and carved a goodbye note to his mom in his arm with a piece of glass. It turns out the urine actually saved his life, as he was immediately admitted to a hospital with severe kidney failure. Doctors during the settlement deliberations confirmed the patient's tactic for survival and not long after, the prosecution won the large 7 figure settlement for their client.

The takeaway from all of this, however, came at the end of the interview. The back and forth between the student and the news anchor regarding the $4.1 million settlement really reignited my suspicion that most people have NO IDEA what to do with a windfall.

CNN News Anchor: "$4.1 million is quite a bit of money. Do you have any plans?"

Student: (5 second awkward pause) "I'm going to lock it up, protect it from myself."

I suppose it wasn't the worst response he could have made. I mean, after all, he was involved in a HUGE drug sting. Maybe he was still stoned? He could have said he's planning to toss hundred dollar bills out the top of a limo in Vegas?

This is great evidence of the lack of financial knowledge many people have. Students in high school receive very little training on how to manage their money, and this student who is an ECONOMICS major, is "going for the retirement."

Well Mr. Student, good for you! Now pick up a book about managing your finances.

Its interesting enough to note that this student was never formally charged with any crimes. I guess the DEA felt guilty enough to let him off the hook in addition to giving him $4.1 million dollars.

To be honest? I don't think he'll have a dollar left of it by his 40th birthday.

What are your thoughts? Are most of the people you know oblivious to their finances? Share your thoughts!

Apr 1, 2016

Mint.com is an exceptional website designed to help people keep track of spending, budget, and set goals while occasionally marketing various financial products to users. On the whole, the user experience is outstanding, and is a site I use several times a week.

Here's What I Use

The "dashboard" screen when you log in consolidates all of your financial accounts (and property) into one place, giving you an up to date look at your personal balance sheet. I have many accounts which I use for different purposes, so I definitely like this screen the most. For example, the "cash" section in the upper left provides the balances for any checking or savings accounts in one simple to read area. Mint also gathers any data on account "titles" from your banks, for example, I use Capital One 360 (formerly ING Direct) and each of my accounts have names such as:

MBA Savings Account

Vacation Account

New Car Account

Home Down Payment Account

Wedding Account (Thanks to Mint, this one is paid for with zero debt)!

I really like how Mint takes all of this data and consolidates it in one place for you.

Beneath the cash section is your credit liabilities, providing the user a nice snapshot of what you owe on any loans, lines of credit, and credit cards so you can manage checking account balances accordingly.

Just below credit and liabilities are investments. This gives you the same type of snapshot, but for taxable and tax advantaged accounts. I also have my savings account in a short term bond fund at vanguard, so this is found here also.

Another great feature is the way Mint tracks your spending. In the middle of the page, it provides a "budget" section with a color coded bar which gives you a feel for how you are doing on your monthly budget targets. I only budget groceries, restaurants, and gas, but you can personalize this as much as you want. All you need to do is click on the word "budget," set a monthly target, and categorize your spending in the "transactions" section as you go.

I also really enjoy the "goals" section. I am currently saving for a trip, a new car, and retirement, so each of these goals has a target, target date, and monthly savings target. It really gives you a lift when you hit your monthly savings goals!

Lastly, Mint.com will send you a weekly "financial summary" email detailing each of your budget categories, as well as a snapshot of account balances and total net worth figure. Watching your net worth figure rise is a big motivator to save, as the progress you make adds up!

...and What I Don't Use

Some of the areas I don't use are the upcoming bills notification and portfolio movers and shakers. I don't really pay attention to my portfolio holdings, except to re balance to my target allocation once/year. The ways to save section offers products from 401k and credit card companies to potentially save the user money, but I don't really use this.

Overall, this is an outstanding site and I'm sure many of you use it already. However, if you don't definitely try it! I was a little concerned before signing up about the safety of my financial information, but Mint is REALLY on the ball with this important area, and all sign-in information to your various accounts remain fully confidential.

Give it a try, you may find that it completely reshapes your spending and saving habits!!!

Welcome

Hi. I'm Lucas, the author of this personal finance blog. I'm a bank manager, MBA, and surfer-in-training out here in Hawaii. The point of this blog is to show that building wealth can be easy as long as you follow a few slow and steady rules. Click here to check out the archives and see if something interests you, or suscribe below to receive free updates.